The power of wishful thinking?

Joe Stiglitz has an Opinionator piece arguing that inequality is a big factor in our slow recovery. Joe is an insanely great economist, so everything he says should be taken seriously. And given my political views and general concerns about inequality, I'd like to agree.

But -- you knew there was a "but" coming -- I've thought about these issues a lot, and haven't been able to persuade myself that this particular morality tale is right.

Fortunately, last week Krugman found a way to persuade himself of what he said he'd "like" to believe last year:

But there's now growing evidence for a new view -- namely, that the whole premise of this debate is wrong, that there isn't actually any trade-off between equity and inefficiency. Why? It's true that market economies need a certain amount of inequality to function. But American inequality has become so extreme that it's inflicting a lot of economic damage. And this, in turn, implies that redistribution -- that is, taxing the rich and helping the poor -- may well raise, not lower, the economy's growth rate.

You might be tempted to dismiss this notion as wishful thinking, a sort of liberal equivalent of the right-wing fantasy that cutting taxes on the rich actually increases revenue. In fact, however, there is solid evidence, coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy.

Perhaps Krugman was inspired by his employer, the New York Times. In 1987 they advocated abolishing the minimum wage, although a liberal paper like the Times undoubtedly wished a minimum wage could reduce poverty. Now the NYT has decided that the laws of supply and demand no longer apply to labor markets. The Times has switched to favoring keeping the minimum wage and indeed raising it higher.

Here's Paul Krugman in 1999, talking about the dilemma faced by Japanese policymakers when at the zero interest rate bound:

What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?

That was the whole point of my recent post on quantum mechanics. The standard model says that when NGDP is too low it's because money is too tight. Krugman gets it, or did in 1999. So why am I and a few other MMs almost the only people in the economics profession who still believe in the "conventional, boring model"? Why don't other economists believe that tight money caused the Great Recession?

Of course today Krugman is a big government Keynesian, and believes fiscal policy is the way to go.

. . . I see that some of the commenters on my libertarian piece invoke the old "horrors of the DMV" line to claim that government never works.

What's remarkable about this line is that it reflects a fantasy -- in this case, a negative fantasy -- more than the reality. I'm sure that there are terrible DMV offices where people have miserable experiences, but that's by no means universal or even normal. These days you can usually make appointments online; and even when you don't, how bad is the experience?

That's funny, last week I walked by a DMV office in the Watertown Mall, and the line snaked out of the office and all down the hall, almost to Target.

Perhaps my mistake is not focusing enough on what I'd like to believe. Next time I return from overseas as I leave the airplane I'm going to visualize more than 20% of the passport control booths being occupied, and the line being less than an hour. Next time I go to the Post Office to pick up a package, I'm going to first envision a very short line and postal employees who do not look like they are moving through molasses as they work. Ditto for the DMV.

Sometimes an economist will change his view on a single issue because of some new empirical study (although that actually doesn't happen as much as you'd think, or as much as you might like.) But what about when an economist suddenly swings sharply to the left or right on a whole range of unrelated issues? What's going on in that case? It's never happened to me, so I can't answer that question.

PS. Notice how Krugman compares the apparently now respectable idea that high marginal tax rates on work and wealth creation encourage more work and wealth creation, to the "right-wing fantasy" that high marginal tax rates on work and wealth creation encourage less work and wealth creation, and hence might reduce revenue.

PPS. After writing this I noticed that David Henderson has a more upbeat view of the DMV.

Comments and Sharing

Stating that higher marginal rates result in more work and wealth creation is ganja economics (legal now in some states). While most people don't have the luxury of giving up and working less, the only way that higher taxes result in more wealth creation is if the government creates more wealth with the extra taxes than the private sector.

Blogging software: Powered by Movable Type 4.2.1.
Pictures courtesy of the authors.
All opinions expressed on EconLog reflect those of the author or individual commenters, and do
not necessarily represent the views or positions of the Library of
Economics and Liberty (Econlib) website or its owner, Liberty Fund,
Inc.

The cuneiform inscription in the Liberty Fund logo is the
earliest-known written appearance of the word
"freedom" (amagi), or "liberty." It
is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.